The economy needs the federal funds rate to remain low, according to Federal Reserve Bank of San Francisco president Janet L. Yellen.
“When the day comes to start raising rates again, we have tools at the ready. But, for the time being, the economy still needs the support of extraordinarily low rates,” she said in a speech at the University of San Diego Monday, according to prepared text released by the Fed.
Yellen said the economic tide appears to have turned and there is “convincing evidence” of economic recovery. But that “doesn’t mean we’re where we ought to be. Far from it. In particular, the unemployment rate is unacceptably high, creating real hardship for millions of Americans. But at least we’re heading in the right direction,” Yellen said.
However, she said, “the economy will be operating well below its potential for several years.”
Noting the 5.7% gain in gross domestic product in the fourth quarter, she said: “If we were able to sustain growth like this, we would experience a vibrant V-shaped upswing like those that occurred following past severe recessions.” But Yellen quickly added that she doesn’t expect a V-shaped recovery because the GDP numbers are skewed by inventory levels, and sales to consumers grew a “lackluster 2.2%.”
Consumers, she said, are still reluctant to spend, but not as much as they had been, and many households are paying down debt. Housing appears to have stabilized, Yellen said, noting that she doesn’t expect “a sharp turnaround,” and the sector may slip again when the Fed stops buying mortgage-backed securities at the end of March.
Also hindering thoughts of a V-shaped recovery, “businesses remain very nervous and exceedingly cost conscious,” she said, and are unlikely to lead the recovery, especially since many are hindered by lack of credit.
“Put it all together and you have a recipe for a moderate rate of economic growth, well below the sprightly pace set in the fourth quarter,” Yellen said.
“The current quarter appears on course to post growth of around 3%. I see the economy gradually picking up steam over the remainder of this year as households and businesses regain confidence, financial conditions improve, and banks increase the supply of credit,” she said.
“I expect growth of about 3½% for the year as a whole, picking up to about 4½% next year, with private demand coming on line to pick up the slack as government stimulus programs fade away.”